World Bank Economic Report: Formal Vs. Informal Financial Services

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A World Bank report released last week reports that “informal” financial services continue to play an important role in the lending sector in Laos despite the fervent growth of legal micro-finance institutions (MFIs) around the country.

According to the report, which employs data garnered from Lao authorities, the legal micro-finance sector saw rapid expansion around the country. The total assets of MFIs in Laos reached US$450 million by the middle of last year. This figure marked an 11 percent increase over the same period last year, accounting for about 3% of the country’s GDP.

The World Bank also mentioned that the proportion of Lao adults using at least one regulated financial service was 47% in 2014, higher than Myanmar (at 30%), but lower than Nepal (at 61%) during the same year. It is surprising, however, to note that despite the growth of banking and non-banking institutions in Laos, informal financial services continue to play a key role in lending money to a significant proportion of the population. The reported number of adults using unregulated financial services was as high as 60% in 2014, compared to 33% in Myanmar and 21% in Nepal.

The World Bank report further noted that the interest rates offered by informal finance services in Laos were higher than those of formal financial institutions. However, this has not discouraged people from using their services. The strength of informal financial services was that they imposed fewer procedural requirements (as opposed to formal banks and MFIs).

Lao officials admit that one of the primary concerns for businesses seeking access to business expansion capital was the unnecessarily high number of processes they have to undertake in order to apply for commercial loans.

The Lao government has promised to streamline the loan approval process to help businesses access funds to invest in and to expand their businesses.

The Governor of the Bank of the Laos, Somphao Phaysith, said that the central bank is borrowing US$300 million to boost the expansion of SMEs. Some observers note that massive injection of funds into the micro-economic sector may help Laos handle the issue of informal financial services.

The Lao Economic Monitor is published twice yearly by the World Bank office in Laos.

To download the report, click here.

Source: Vientiane Times

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